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Matthew Mann
 
February 4, 2011 | Compliance, Direct-To-Trade | Matthew Mann

North Dakota, Self-Distribution and Granholm

At first glance it looks good. The North Dakota House passes HB 1340, which amends section 5-01-17 of the North Dakota Century Code to read "A domestic winery may sell to a wholesaler or directly to a retail licensee." Previously this section expressly prevented a domestic winery from "engaging in wholesaling activities". North Dakota is opting in to self-distribution by wineries, allowing them to bypass wholesalers and sell directly to retailers and restaurants.

What’s less obvious is that the domestic winery license is only available to wineries located in North Dakota and that a minimum percentage of grapes used to produce the wine, beginning with 10% and rising over time, must be grown in the state. The license is clearly only available to wineries that are resident to the state of North Dakota, and as such, the privilege to self-distribute is also limited to resident North Dakota wineries. A similar situation was present in the New York law in question in Granholm. That law required a physical presence in the state for wineries to avail themselves of direct shipping privileges to consumers.

The Granholm decision clearly elucidated the doctrine that, while the states retained substantial authority under the 21st Amendment to regulate alcoholic beverages within their borders, laws that discriminate on their face against nonresident wine producers in favor of resident wine producers were an unconstitutional violation of the dormant Commerce Clause and thereby invalid unless the state “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.”

North Dakota legislators, either consciously or otherwise, have clearly decided to pass a law that discriminates against nonresident wineries on its face, since nonresident wineries are not eligible for the license based solely on their residence. They are denied access to the trade market in the same manner available to North Dakota winery, much the same way nonresident wineries were denied access to the New York consumer market.

Some might argue that Granholm was a narrowly decided case, focused only on winery direct shipments to consumers, and would not apply here. But the rationale of Granholm is based on access to the marketplace and the state preventing such access on a discriminatory basis. This is unlike cases involving Granholm's applicability to access by other tiers of the 3-tier system, such as the right of nonresident retailers to access out-of-state markets due to discriminatory laws currently being litigated in Wine Country Gift Baskets v. Steen. The North Dakota law is focused exclusively on wineries, the production tier of the 3-tier system and as such, that end of any argument is inapposite.

The real question is "what distinguishes retailers from consumers such that Granholm does not apply?"

One key distinction is that retailers are required to be licensed by the state in order to buy and sell alcoholic beverages. They are readily accountable to the state to collect and remit taxes, file reports of sales activity, and generally obey the laws and regulations against performing prohibited acts in the conduct of their business.

Consumers, on the other hand, are generally unregulated. They are not required to be licensed to purchase alcoholic beverages nor are they required to pay taxes or file reports with the state regarding their purchase of alcoholic beverages. It is true that consumers must also obey certain prohibitions in their use of alcoholic beverages, but these prohibitions are directed at their behavior in their use and consumption of alcoholic beverages, rather than tax collection or the behavior of others.

It is difficult to see distinctions between retailer and consumers that would make analogy to Granholm inapplicable.

Also, it is difficult to see how any legitimate local purpose is served that cannot be served by less discriminatory means. The proponents of the discriminatory laws that were the subject of Granholm presented "two primary justifications for restricting direct shipments from out-of-state wineries: keeping alcohol out of the hands of minors and facilitating tax collection", both of which were ultimately rejected by the Court as insufficient to sustain the discriminatory nature of the laws.

Indeed, in light of the distinguishing characteristics of the two, it appears that the very nature of retailers and consumers weighs considerably in favor of a determination that the legitimate local purpose concerns are lesser, rather than greater, in the sales to retailer context.

North Dakota is to be commended for providing alternative routes to market for struggling wineries shut out of the distribution chain, but Granholm makes clear they must make access to the market fair for both instate and out-of-state producers. This law appears to be a prime opportunity to extend Granholm to fairness in self-distribution privileges.
 

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